The Dismantling of the Standard Oil Trust
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The Dismantling of The Standard Oil Trust The saga of Standard Oil ranks as one of the most dramatic episodes in the history of the U.S. economy. It occurred at a time when the country was undergoing its rapid transformation from a mainly agricultural society to the greatest industrial powerhouse the world has ever known. The effects of Standard Oil on the U.S., as well as on much of the rest of the world, were immense, and the lessons that can be learned from this amazing story are possibly as relevant today as they were a century ago. Standard Oil Company was founded by John D. Rockefeller in Cleveland, Ohio in 1870, and, in just a little over a decade, it had attained control of nearly all the oil refineries in the U.S. This dominance of oil, together with its tentacles entwined deep into the railroads, other industries and even various levels of government, persisted and intensified, despite a growing public outcry and repeated attempts to break it up, until the U.S. Supreme Court was finally able to act decisively in 1911. John D. Rockefeller John Davidson Rockefeller was born the second of six children into a working class family in Richford, (upstate) New York in 1839. In 1853, the family moved to a farm in Strongsville, Ohio, near Cleveland. Under pressure from his father, Rockefeller dropped out of high school shortly before commencement and entered a professional school, where he studied penmanship, bookkeeping, banking and commercial law. In 1859 Edwin Drake struck oil in Titusville, in western Pennsylvania. This triggered an oil rush to the region and marked the start of oil as a major industry in the U.S. Coincidentally, this was the same year that Charles Darwin's On the Origin of Species was published, a work that had a great influence not only on the sciences, but also on business and society in general. It was also in 1859 that Rockefeller started his first business. With $1,000 he had saved and another $1,000 borrowed from his father, and in partnership with another young man, Maurice B. Clark, he set up a commission business that dealt with a variety of products including hay, grain and meats. After the outbreak of the Civil War in 1861, Rockefeller hired a substitute to avoid conscription, as was not uncommon among Northerners in those days. Although the war initially disrupted the economy, it soon began to stimulate development in the North, and this appears to have been an important factor in Rockefeller's sudden and spectacular success. The Titusville discovery led to the swift ascent of a major new industry based largely on the use of kerosene for lighting. Oil refining became largely concentrated in Cleveland because of its proximity to the oil fields of Western Pennsylvania, its excellent (and competitive) railroad service, its availability of cheap water transportation (on adjacent Lake Erie) and its abundant supplies of low cost immigrant labor. Rockefeller was immediately attracted to the oil business, and in 1863, at the age of 24, he established a refinery in Cleveland with Clark and a new partner, Samuel Andrews, a chemist who already had several years of refining experience. Fueled by the soaring demand for oil and Rockefeller's ambition, this refinery became the largest in the region within a mere two years, and Rockefeller thereafter focused most of his attention on oil for the next three decades. Standard Oil Company In 1870, Rockefeller, together with his brother William, Henry M. Flagler and Samuel Andrews, established the Standard Oil Company of Ohio. This occurred while the petroleum refining industry was still highly decentralized, with more than 250 competitors in the U.S. The company almost immediately began using a variety of cutthroat techniques to acquire or destroy competitors and thereby "consolidate" the industry. They included: (1) Temporarily undercutting the prices of competitors until they either went out of business or sold out to Standard Oil. (2) Buying up the components needed to make oil barrels in order to prevent competitors from getting their oil to customers. (3) Using its large and growing volume of oil shipments to negotiate an alliance with the railroads that gave it secret rebates and thereby reduced its effective shipping costs to a level far below the rates charged to its competitors. (4) Secretly buying up competitors and then having officials from those companies spy on and give advance warning of deals being planned by other competitors. (5) Secretly buying up or creating new oil-related companies, such as pipeline and engineering firms, that appeared be independent operators but which gave Standard Oil hidden rebates. (6) Dispatching thugs who used threats and physical violence to break up the operations of competitors who could not otherwise be persuaded. By 1873 Standard Oil had acquired about 80 percent of the refining capacity in Cleveland, which constituted roughly one third of the U.S. total. The stock market crash in September of that year triggered a recession that lasted for six years, and Standard Oil quickly took advantage of the situation to absorb refineries in Pennsylvania's oil region, Pittsburgh, Philadelphia and New York. By 1878 Rockefeller had attained control of nearly 90 percent of the oil refined in the U.S., and shortly thereafter he had gained control of most of the oil marketing facilities in the U.S. Standard Oil initially focused on horizontal integration (i.e., at the same stage of production) by gaining control of other oil refineries. But gradually the integration also became vertical (i.e., extended to other stages of production and distribution), mainly by acquiring pipelines, railroad tank cars, terminal facilities and barrel manufacturing factories. Standard Oil Trust The company continued to prosper and expand its empire, and, in 1882, all of its properties and those of its affiliates were merged into the Standard Oil Trust, which was, in effect, one huge organization with tremendous power but a murky legal existence. It was the first of the great corporate trusts. A trust was an arrangement whereby the stockholders in a group of companies transferred their shares to a single set of trustees who controlled all of the companies. In exchange, the stockholders received certificates entitling them to a specified share of the consolidated earnings of the jointly managed companies. The concept of a trust was first proposed by Samuel Dodd, an attorney working for Standard Oil. In the case of Standard Oil, a board of nine trustees, controlled by Rockefeller, was set up and was given control of all the properties of Standard Oil and its numerous affiliates. Each stockholder received 20 trust certificates for each share of Standard Oil stock. The trustees elected the directors and officers of each of the component companies, and all of the profits of those companies were sent to the trustees, who decided the dividends. This arrangement allowed all of the companies to function in unison as a highly disciplined monopoly. Since its earliest days, the U.S. oil industry had been well aware of the power of monopoly and its huge profits potential. Although the seemingly erratic fluctuations of oil prices had convinced many refiners to try to restrict output in a joint effort, these attempts never lasted long because the incentives to cheat were so great. However, the unified organization of the trust finally made the disciplined regulation of production levels possible, thereby giving its owners complete control over prices. The massive and unprecedented profits of Standard Oil were made possible by (1) this control over prices (and the consequent ability to set prices at levels that would maximize profits), (2) the huge economies of scale attained from the control of almost all oil refined in the U.S. and (3) the ability to pressure railroads and other suppliers of goods and services into giving them bargain rates. However, even this unprecedented wealth and power was not enough. Rockefeller and Standard Oil needed ever more. The company thus expanded into the overseas markets, particularly Western Europe and Asia, and after a while it was selling even more oil abroad than in the U.S. Moreover, Rockefeller, in addition to his role as the head of Standard Oil, also invested in numerous companies in manufacturing, transportation and other industries and owned major iron mines and extensive tracts of timberland. The astonishing success of Standard Oil encouraged others to follow the Rockefeller business model, particularly in the booming final decades of the 19th century. Trusts were established in close to 200 industries, although most never came close to Standard Oil in size or profitability. Among the largest were railroads, coal, steel, sugar, tobacco and meatpacking. Public Disgust and Revulsion This trend went far from unnoticed by the general public. In fact, it led to widespread disgust and revulsion, not only among the many people who had their businesses or jobs wiped out by the ruthless predatory tactics of the trusts, but also by countless others who were affected by the increased costs and reduced levels of service that often resulted from the elimination of competition. The monopolization of the economy also became a major topic for the print media, which helped to create a widespread awareness not only of the effects of this consolidation but also of the techniques that were being used to attain it, including the extensive use of fraud, political corruption and physical violence. For example, in 1881 the Atlantic Monthly published Story of a Great Monopoly by the well-known reformer Henry Demarest Lloyd, and the widespread popularity of this article resulted in Lloyd's publication in 1894 of Wealth against Commonwealth, a book-length attack on monopolies based largely on his study of Standard Oil.